While we postulate about the debt collection rules from the federal Consumer Financial Protection Bureau (CFPB), on the state level, the New York State Department of Financial Services (DFS) closed the comment period for its revised proposed regulations on the debt collection industry, targeting non-originating debt collectors which includes servicers. This is the DFS’s second set of proposed rules to regulate the debt collection and servicing industry since July 2013.

Original creditors and their subsidiaries, affiliates, and employees are exempt. Attorneys acting in connection with a pending legal action to collect debt on behalf of a client, and organizations that provide non-profit credit counseling and debt liquidation, are exempt as well.
Statute of Limitations — Of particular interest for servicers operating in the New York area is a provision relating to loans that may be close to reaching the statute of limitations. The new rule will require a servicer to develop reasonable procedures for determining if the loan is subject to an expiring statute of limitations. If the servicer knows or has reason to know the statute of limitations may have expired, the servicer would be required to send a notice to the borrower disclosing information warning the borrower about re-affirmation of the debt before they make a payment. The notice must also include a statement informing the borrower that a lawsuit commenced on expired debt violates the Fair Debt Collection Practices Act, 15 U.S.C.§ 1692, in addition to other specific disclosures. An acceptable form of the notice can be found within the body of the regulations.

In addition, the revised proposed rules set forth debt validation requirements and procedures, or what the DFS calls requests for substantiation. Under the proposed rule, whenever the borrower makes an initial oral or written request to validate the debt, the servicer must provide information as to how to request substantiation of the debt; there are deadlines for providing responses to those requests. If the debt was charged-off, meaning “… the accounting action taken by an original creditor to remove a financial obligation from its financial statements by treating it as a loss or expense …” the servicer must respond to the request within 60 days of receipt and must stop collection activities until validation is complete.

Rounding out the rules are requirements that will apply to situations when a debt payment schedule or other agreement to settle the debt is agreed upon, arguably including loan modification agreements. In those situations, the servicer is required to send written confirmation of the new payment schedule or agreement to settle the debt, and include the material terms, conditions, and a prescribed notice that the borrowers are liable for the new debt along with a list of income not subject to further collection. Further, the proposed rules impose a restriction on contacting borrowers by electronic mail without first obtaining the borrower’s consent to communicate in that manner.

Tellingly, the proposed rules fail to give any statement of statutory authority for DFS to promulgate these rules and enforcement provisions and penalties for non-compliance are not addressed. Servicers will need to institute processes to assess their New York portfolios to comply with these regulations, as well as to reconcile those processes with developing federal and state laws.